Humana Inc. Managing in a changing industry Harvard Case Solution & Analysis

Humana Inc. Managing in a changing industry Case Solution

Financial analysis and valuation

From the following results, it is determined that how the spin-off strategy would value the independent business entity of Humana. The value of hospital segment subsidiary would allow the company to manage operations in a different way as compared to consolidated figure and would benefit to increase the necessary profits through spin-off strategy. Following are the techniques used to value an independent entity:

Consolidated income statement

The historical consolidated income statement of the combined entity shows that it has reduced profit margins in the recent years due to the increasing cost of healthcare services and government imposed levies.

The consolidated income statement would be useful to analyse the division results. For the projected results of the subsidiary, the projections of the proposed figures have been used in order to get expected results of the entity against the combined results.

Projected Income Statement (Hospital)

After analysing the consolidated figure of the combined entity, the particular portion of the net earnings would go to Hospital region of Humana. According to the current results, total revenues generated by the Hospital region would be 68% of the consolidated figure; its expected to grow at the same margin in future.

On the other side, the expected operating expenses would tend to grow by 77% of the total revenues of Hospitals of Humana. The net earnings were not showing positive results as compared to strong figure of health plan. According to the inflation threat for the coming period, it is identified that the earnings would tend to decrease if the certain changes regarding the cost deduction of the operating expenses would not be changed.

Consolidated Balance Sheet 

In order to determine the expected value of fixed and current assets for the Hospital region of Humana, the historical consolidated balance sheet is used to analyse the potential divided assets of both the subsidiaries. From the figure, it shows that how much the fixed amount of distribution would be granted to new subsidiary of Humana. For that, the traditional ration analysis is calculated in order to the expected changes for new entity's assets by calculating the average values.

Projected Balance Sheet (Hospital)

From the following analysis made in the consolidated balance sheet through the use of the changes in the rates of the assets and liabilities, these rates would be applied to the projected income statement of hospital under Humana. Therefore, the net values show that the particular amount of assets and liabilities would be granted to the new entity and projected under a five-year plan for valuation of the entity's price.

Weighted average cost of capital

In order to assess the weight of equity and debt for the new entity, the tool of WACC has been used to analyse the value of the company through the use of the net present value calculations. For the value of WACC, the risk-free rate has been analysed by indicating the value of T-bills of the government rate, whereas the market risk premium under the current economic situation is assessed to be 8% annually.

The value of beta is calculated by averaging the industry beta; after all the inputs are determined, cost of equity is calculated through the use of these rates and is expected to be 13.8% for the new entity of Humana. The cost of debt is assumed to be 10% of the Hospital region due to the fewer debt obligations in the historical data. After analysing the weights of both the equity and debt, the total expected weighted average cost of capital for new entity would be 13.8%.....................

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